Last month I ran across a fascinating study by economist John Cochrane. He is a senior fellow at the Hoover Institution, former University of Chicago professor, and adjunct scholar with the Cato Institute. Show Cochrane wrote a paper on economic growth last year as part of a project to design presidential debate questions where he took a matter-of-fact approach to the growth problem. What are the barriers to productivity growth, and what can we do to remove them? Not surprisingly, most barriers are the result of counterproductive government policies. I’ll highlight here a few from Cochrane’s paper. Barrier #1: Government InterferenceThe government interferes in just about every segment of the economy. Sometimes it brings benefits like traffic safety and clean air. More often, regulation simply slows growth in order to transfer wealth from one group to another. It interferes with growth by impeding competition and distorting economic incentives. It distorts the signal that individuals send markets about their preferences and adds a great deal of noise and cost, which distorts economic activity from being its most efficient. Barrier #2: The Dodd-Frank Financial RegulationsThe Dodd-Frank financial regulations had the laudable goal of preventing future bank crises, but in reality, they simply work against other government policies. Washington encourages and subsidizes debt and then tries to prevent the inevitable consequences. We wouldn’t need Dodd-Frank if the government were not rewarding excessive debt. Excessive, unproductive debt of the type we are generating in the US and Europe actually inhibits growth. We’re all frustrated by Obamacare and health insurance generally. What we need is simple, portable, catastrophic health insurance. Instead of promoting it, the government makes it illegal. Barrier #4: Energy SubsidiesHere again the government works at cross-purposes with itself. It subsidizes energy so that it costs less, then tries to prevent us from using too much of it. Cochrane says the ethanol mandate helps no one but the large corn-producing companies. Ditto for solar subsidies. Barrier #5: TaxesTaxes should raise revenue, but instead we use them to redistribute income and encourage/discourage behavior. A simpler tax code would remove massive economic distortions, and it would be far better to tax consumption instead of income. Barrier #6: Income-Based Social ProgramsCochrane sees no need to be stingy with helping people in genuine need. Welfare programs are far less costly than the many subsidies we give the middle class and large corporations. The problem is that perverse incentives trap people and make them permanently dependent. He suggests consolidating all the aid programs and making them time-based, like unemployment benefits, rather than income-based. Barrier #7: Immigration TermsWe can end illegal immigration overnight, says Cochrane, by making it legal. The question is the terms we apply to legal immigration. We should welcome skilled workers who want to stay in the US and contribute to our economy. He also points out, wisely, that whether someone should be here is a separate question from whether they should be allowed to work here. Barrier #8: Public SchoolsPublic schools do not need more money; they need correct incentives. The way to deliver them and ensure better opportunities for all is to adopt vouchers and charter schools. The government doesn’t have to directly provide the service in order to help people afford it. Implementing these reforms is a political challenge, not an economic one. One man’s waste is another man’s subsidy. People naturally resist when they perceive they are on the losing end of the bargain. Serious change is very hard if everyone insists on keeping whatever benefits they presently have. Subscribe to Mauldin Economics Our free newsletters will help you understand what's happening in the world’s economy so you can make informed investment choices based on clear and valuable observations.
Against this difficult backdrop, a variety of economic challenges mount for emerging market and developing economies (EMDEs)—including continued COVID-19 outbreaks, elevated inflation, record debt levels, and rising income inequality. The latest Global Economic Prospects report predicts that global growth will decelerate from 5.5 percent in 2021 to 4.1 percent in 2022 and 3.2 percent in 2023 as pent-up demand dissipates and as fiscal and monetary support is unwound across the world. The rapid spread of the Omicron variant, moreover, indicates that the pandemic will likely continue to disrupt economic activity in the near term. Among EMDEs, growth is expected to drop from 6.3 percent in 2021 to 4.6 percent in 2022 and 4.4 percent in 2023. The outlook poses particular dangers for EMDEs. First, the notable deceleration in major economies—including the United States and China—will reduce external demand for goods and services for many EMDEs. Moreover, the slowdown is occurring just when governments in many of these economies are running out of policy space to respond, if necessary, to the emerging challenges: new COVID-19 outbreaks, persistent supply-chain bottlenecks and inflationary pressures, and elevated financial vulnerabilities in large swaths of the world. The combination of these threats could increase the risk of a hard landing in these economies. “Advanced economies and emerging market and developing economies are on two different flight paths,” said Ayhan Kose, Director of the Prospects Group at the World Bank. “While slowing, advanced economies are still flying high, and their combined output is expected to go back to the pre-pandemic trend by 2023. Emerging and developing economies, however, are flying low—and they do not have much gas left to use in terms of policy space if they encounter headwinds. That’s why we’re worried about a hard landing.” Income Inequality on the RiseThe COVID-19 pandemic increased global income inequality, partly undoing two decades of progress in lowering inequality and disproportionately affecting vulnerable groups and EMDEs, where income inequality is considerably higher than in advanced economies. Significant increases in between-country inequality are the result of the two-track pandemic recovery, while a moderate increase in within-country inequality in EMDEs reflects the severe income losses and employment disruptions experienced by vulnerable groups: lower-income households, low-skilled and informal workers, and women. Within-country inequality remains particularly high in Latin America and the Caribbean and Sub-Saharan Africa, where about two-thirds of the world’s extreme poor lives. But inequality spans more than income, particularly in EMDEs and low-income countries. —a rate that will result in only about one-third of the population receiving one vaccine dose by the end of 2023 at current rates. Pandemic containment measures have severely disrupted children’s learning, intensifying educational inequality. Telecommuting and digital opportunities such as remote education have not been equally accessible to low-income households. Gender inequality has also increased and informal workers have suffered particularly large job and income losses.
Growth in developing countries faces significant hurdles, but there is hope. Image: REUTERS/Luke MacGregor License and Republishing World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use. The views expressed in this article are those of the author alone and not the World Economic Forum. John Letzing October 24, 2022 Simon Torkington October 21, 2022 Stephen Hall October 20, 2022 Martin Armstrong October 20, 2022 Anna Fleck October 20, 2022 Stefan Ellerbeck October 19, 2022 |